The High Cost of College

Over at 11D, Laura asks a question that's on a lot of minds these days:

'm certain that college (though not many graduate programs) do lead to higher lifetime salaries. However, costs have gotten out of control. Why have tuition rates gone up so much? How does a six figure student loan burden affect a person's future?

The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we'll have more middle-class people. But homeownership and college aren't causes of middle-class status, they're markers for possessing the kinds of traits -- self-discipline, the ability to defer gratification, etc. -- that let you enter, and stay, in the middle class. Subsidizing the markers doesn't produce the traits; if anything, it undermines them.

In the case of higher education, the form this subsidy took was particularly pernicious: student loans. It seems pretty unlikely to me that the student loan in anything like its current form would exist without government intervention. To be sure, private loans were readily available for professional school, at least when I was attending. But those loans were being made to students who had at least demonstrated their ability to finish college, get into a decent graduate school, and (in the case of MBAs), maintain an adequate credit report, and work for several years in between. Who but a lunatic would loan money to an eighteen year old with no job and no credit record, in the hopes that they will graduate college and begin speedy repayment?

To make this product work on a mass scale, you need the government guarantee--and the government's ability to shield those loans from bankruptcy. The default rate on student loans is 7%, not all that much lower than the current 8.8% default rate on credit card loans--even though student loans are not dischargeable in bankruptcy, are deferrable for hardship, and are supposed to be made to people who end up with higher than average earning power.

But beyond the high default rates, consider what a student loan does. In the past, college degrees conferred higher incomes on those who earned them. But almost all of that surplus went to the student rather than the college, because aside from a small number of extremely affluent families, the students were young and did not have that much cash. If colleges wanted to expand their market, college tuition was constrained to what an average student, or their family, could pay.

Introducing subsidized loans into the picture allowed students to monetize that future income now. It's hardly surprising that colleges began to claim more and more of the surplus created by their college degree. Think about it this way: if colleges create an extra million in lifetime salary, you're theoretically better off if you pay them the discounted present value of $999,999 in order to earn that extra million.

In the real world, it's more complicated than that--there are hedonic benefits (and drawbacks) to going to college, which will shift the actual price people are willing to pay; there is the opportunity cost of foregone salary; there is risk; and there is the fact that college freshmen usually aren't so good at calculating the present value of future cash flows.

But as you can see from the chart above, $1 million is close to the lifetime value of a college degree (it's actually about $1.4 million), and colleges are getting better at extracting quite a lot of that value for themselves. And I expect that trend to continue for a while, until either the political will for the program is overwhelmed by the side effects (the diploma mills add little value, and burden students with high loans), or the middle class simply revolts, and decides the risk and the higher tuition aren't worth the benefit. The present value of an extra $1.4 million is well over a quarter of a million dollars.

Not, mind you, that I think that colleges think of this in quite such mercenary terms. Rather, they keep pushing the boundaries (and keep telling themselves how valuable a college degree is), and students keep telling themselves how valuable a college degree is, and paying up. But I think this is the underlying dynamic.

So why not just switch to subsidies, instead of loans? Wouldn't that solve the problem?

Not really. Even if we wanted to do this, we could hardly afford direct subsidy of America's world class university system along European lines; there's a reason that European universities seem so perpetually starved for resources. In my experience, the European system also produces, even more than the American one, large numbers of students who dawdle along towards a degree because being in school is very cheap, and preferable to working.

Either we'd gut the best university system in the world to save money, or we'd simply relieve the burden on students by shifting it to taxpayers. Meanwhile, we'd free students of the need to think about the cost, and value of their education--which sounds nice if you think about future nuclear physicists skipping gaily towards the registrar, and less nice if you think about Perpetual Students who never quite finish that degree in Old Church Slavonic.

We could fix the loan system at the edges in much the way the administration is trying to: make colleges accountable for high default rates and low completion rates among their students. But there are no easy, free answers: penalize high drop out rates, and people will be afraid to serve communities with historically low educational attainment; limit the loan amounts to modest sums, and many colleges return to being the playgrounds of rich kids and the lucky handful of scholarship students.

I'm tempted to simply say we ought to end the subsidies altogether, but I don't know what the counterfactual is. When my parents were in college, it was possible to work your way through a good four year school; these days, that's difficult to impossible. Have loans really increased access? Or have they simply made it more expensive? Is the marginal supply those loans created--like the for-profit diploma mills--actually adding value, or merely allowing naive students to beggar themselves for a worthless degree? I'm fairly comfortable diagnosing the problem. But I'm less sure of what the solution should be.

We want to hear what you think about this article. Submit a letter to the editor or write to letters@theatlantic.com.